Posts Tagged ‘tax’

Should your teenager file a tax return? Here are ten situations when a teenager may need to prepare a tax return.

Your teenager received a W-2 and federal income tax was withheld. Look at your teenager’s W-2 Box 2 Federal income tax withheld. He or she may be due a refund of that money.

Your teenager received a form 1099MISC and Box 7 Nonemployee compensation has an amount in it. Your teenager has been classified as an independent contractor and needs to file a tax return to pay self-employment tax. Read more about worker classification of teenagers at TeensAndTaxes.com.

Your teenager received more than $1,050 in investment income from interest and dividends in a year. Investment income greater than $1,050 is taxed.

Your teenager had a mix of earned income from a job or a business and investment income. He or she may owe tax on the combined income.

Your teenager started a business and made a profit. He or she may need to pay income tax and self-employment tax. Visit my website MicroBusinessForTeens.com if your teenager has questions about starting or running a micro business.

Your teenager started a business and lost money on it. He or she may wish to file a tax return to reduce their taxes in this year or future years.

Your teenager received a form 1099B from a broker, bank or mutual fund company because he or she sold stock or a mutual fund and had a gain on the sale. Your teenager should file a tax return and include the stock sale on a Schedule D.

Your teenager sold stock or a mutual fund and has a loss on the sale. He or she may wish to file a tax return to reduce their taxes in this year or future years.

Your teenager had earned income from a job or a business and wishes to open a Roth IRA.

Your teenager received several W-2s, but did not have federal income tax withheld on all the W-2s (look at Box 2). They may not have had enough tax withheld and may owe income tax.

If any of these situations happen to you, read more about teenagers and taxes in my book, Teens and Taxes,

For $5.00, you’ll get accurate information that’s easy to understand..

Investment income includes interest, dividends, and capital gain distributions.

History

In the past, many high-income parents found they could transfer some of their income into their child’s name and be taxed at the lower rate for the child. Congress created the “kiddie tax” to close this loophole.

Originally, the “kiddie tax” affected children ages 14 and younger. Children with unearned income (meaning income from interest, dividends or capital gains) were taxed at their parent’sincome tax rate. So a parent could wait until a child turned 14 to sell appreciated stock and would then be taxed at the child’s lower rate.

In 2006, the kiddie tax was changed and the age was raised to 18 years old. Then, in 2008 and 2017, the kiddie tax age was raised again. Currently, the kiddie tax now applies to all children under age 18, as well as to full time students who are 19 through 23 years old and are not self-supporting.

Investment Income Limits

Some of a child’s investment income is tax-free, while some is taxed at the child’s rate. There are limits on how much of a child’s investment income can be tax-free and how much can be taxed at the child’s lower rate. The first $1,050 of investment income for a child is still tax-free (for 2018). The next $1,050 is taxed at the child’s tax rate.

Any amounts over $2,100 per year (for 2018) are taxed at the federal trust and estate tax rates.This is a change in 2018. Chirldren’s investment income used to be taxed at their parent’s income tax rate. That made calculating the kiddie tax very complicated. Its a simpler calculation now, but pay be more punitive sine the tax rates for trusts and estates are now used.

Sometimes teenagers can be classified as household employees. Examples of a household employee include:

Babysitters

Caretakers

Cleaning people

Domestic Workers

Drivers

Health Aides

Housekeepers

Maids

Nannies

Private Nurses

Yard Workers

Household employees under the age of 18 are not considered self-employed business owners for tax purposes and so they do not pay self-employment tax. This is a huge tax benefit for teenagers. It immediately gives them a 15% pay raise (the rate of self-employment tax).

Below is an example of how this could play out.

Sarah, age 16, goes to a neighbor’s house and babysits their three children several times a month. In one month she made $75. She is a teenage household employee. Sarah will not owe self-employment tax on her babysitting income. If babysitting is her only source of income, she will not owe federal income tax either, since her income is under the threshold of $12,00 for 2018.

However, if Sarah has income from another job or investments, she may have to file a tax return. In this case, list her babysitting income on Form 1040, Line 1 “Wages” and mark it as “HSH” for Household employee.

Usually teenagers should file their own tax returns separate from their parents’ return.

If a teenager has earned income for a job or self-employment, he should file his own return. A teenager’s earned income should not be added to his parents tax return. The parents will probably pay too much income tax if they add their teenager’s earned income to their return.

The only time the IRS allows parents to include a child or teenager’s income on their tax return is for unearned income belonging to a child. Unearned income is income from investments such as interest on a savings account, dividends from stock or mutual fund and capital gains distributions from a mutual fund belonging to the child.

Parents, if your child or teenager has unearned income, do not simply add it to your income. You must complete a Form 8814 Parents’ Election to Report Child’s Interest and Dividends. The IRS warns that electing to include your child’s investment income on your return could result in higher income tax.

For my tax clients, I always file a separate return for the teenager or child. It keeps things clearer by separating the income between the parent and child.

My ebook Teens and Taxes can be a big help to prepare you teenagers tax return. I explain taxes for teenagers in detail and even show you how a tax return should look on your teenager.

Last tax season, Todd’s mother contacted me. Todd, a teenager, had been hired to work in construction and thought he was an employee. Todd and his mother were confused and surprised to be given a 1099MISC form instead of a W-2.

A 1099MISC form is given to independent contractors. It shows that no taxes had been withheld or paid to the IRS. On the other hand, a W-2 is the form given to an employee to show the total income earned in a year and clearly shows how much tax was sent to the IRS on behalf of the employee.

Imagine their surprise (and anger) when I explained that Todd was a self-employed business owner and would owe income tax as well as self-employment tax

Was Todd an employee or an independent contractor? I discussed the facts of his work situation with his mother. He was hired by a business owner to do construction work. Todd and several other teenage boys used the business owner’s tools, worked only for him all summer and did what they were told (like employees).

Todd should have been classified as an employee and had taxes withheld from his paycheck.

My ebook Teens and Taxes can be a big help to prepare you teenagers tax return. I explain teenagers as Independent Contractors in detail and even show you how it should look on your teenager’s tax return.

I shared the 5 times you may need to prepare a tax return for your teenager.
Here are five more times your teenager needs to file a tax return:

Your teenager started a business and lost money on it. He or she may wish to file a tax return to reduce their taxes in this year or future years.

A Form 1099B arrived from a broker, bank or mutual fund company because he or she sold stock or a mutual fund and had a gain on the sale. Your teenager should file a tax return and include the stock sale on a Schedule D.

Sold stock or a mutual fund and has a loss on the sale. He or she may wish to file a tax return to reduce their taxes in this year or future years.

Earned income from a job or a business and wishes to open a Roth IRA.

Your teenager received several W-2s, but did not have federal income tax withheld on all the W-2s (look at Box 2). They may not have had enough tax withheld and may owe income tax.

If any of these situations happen to you, read more about teenagers and taxes in my book Teens and Taxes. For $3.00, you’ll get accurate information that’s easy to understand..

When does a teenager need to file a tax return? Here are five common situations when a teenager needs to file a tax return.

A W-2 arrived and federal income tax was withheld. Look at your teenager’s W-2 Box 2 Federal income tax withheld. He or she may be due a refund of that money.

A Forrm 1099MISC arrived and Box 7 Nonemployee compensation has an amount in it. Your teenager has been classified as an independent contractor and needs to file a tax return to pay self-employment tax.

More than $950 in investment income from interest and dividends in a year. Investment income greater than $950 is taxed.

Mix of earned income from a job or a business and investment income. He or she may owe tax on the combined income.

Your teenager started a business and made a profit. He or she may need to pay income tax and self-employment tax. Visit my website MicroBusinessForTeens.com if your teenager has questions about starting or running a micro business.

If any of these situations happen to you, read more about teenagers and taxes in my book Teens and Taxes. For $5.00, you’ll get accurate information that’s easy to understand.